Question

Consider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real GDP and total expenditure equal to ( $ 100?

Answer 1

To find the equilibrium level of output in this economy, we need to calculate the aggregate demand by considering the components of consumption, investment, government spending, exports, and imports. Summing up these components will give us the equilibrium level.

Step-by-step explanation:

The equilibrium level of output for this economy can be determined using the Keynesian cross diagram. To find the equilibrium level of output, we need to consider the components of aggregate demand, which include consumption, investment, government spending, exports, and imports.

In this scenario, the tax rate is 0.4 of national income, the marginal propensity to consume out of the after-tax income is 0.8, investment is $2,000, government spending is $1,000, exports are $2,000, and imports are 0.05 of after-tax income.

To calculate the equilibrium level of output, we need to sum up the components of aggregate demand:

1. Consumption = MPC * After-tax income = 0.8 * (National income - Tax)
2. Aggregate demand = Consumption + Investment + Government spending + Exports - Imports

Once we have the aggregate demand, we can equate it to the level of output to find the equilibrium level.